Knowledge Partners

October 18, 2003

New research counters anti-outsourcing lobby

At last, there is some research to counter the huge negative press generated by the "3.3 million US jobs to be lost due to offshoring" report put out by Forrestor Research.

The Indian software industry and BPO industry association, Nassom, in combination with BPO firm Evalueserve, has published a report--backed with numbers--that makes the case that outsourcing (including offshoring) benefits the US economy in the long-term.

Here are some extracts:

Outsourcing is being understood today as a win-win partnership between Indian and US companies. Both are expected to benefit, with the gains spilling over to the overall economies and domestic markets of the two nations. The Evalueserve-NASSCOM research projects the following benefits for the US economy as a result of outsourcing:

* The US economy can expect net savings of billions of dollars due to offshoring over the period 2002-2010. This is over and above the positive impact on the bottom-lines of companies
* For every US$ 100 of call center work offshored by US firms, US$ 145 is invested back into the US economy in the form of repatriated profits, increased sales of telecom equipment and cost savings.
* Similarly, the amount invested back into the US economy (for every US$100 of work) is US$133 for IT services, and US$ 142 for high end knowledge services like equity research, underwriting, tax preparation and risk management
* Offshoring of IT services has enabled US workers to move to specialized and creative roles while moving process oriented programming to offshore locations. The proportion of specialists in the US IT workforce increased from 38 percent in 1983 to 74 percent in 2002
* Utilization of offshore facilities results in the growth of the local economies and an increase in the disposable income, leading to the expansion of the global market for US goods and services. For instance, in India, the proportion of the consuming class in the overall population expanded from 14 percent to 30 percent in the 1990s and is set to touch 40 percent in 2006-07. The Indian retail sector is expected to expand from US$ 180 billion in 2003 to US$ 300 billion in 2010
* Further liberalization of the Indian economy will provide increased access for US companies to Indian markets.
* India's large middle class will open up a major opportunity for US companies
* The US economy will continue to benefit from the Indian community in the country. Indians are the most advanced minority group in the US, with IT professionals contributing over US$ 500 million to US Social Security, $500 million to income tax and spending over US$1.8 billion during visits

Why Offshoring Is Good for America

"Focusing on job losses in America without recognising the corresponding job gains is like managing a bank account by counting the withdrawals, and not the deposits; disregarding the improvements in the quality of jobs is like ignoring the interest payments," says Max P. Michaels, Co-founder of CRYZTAL Capital. "Indian business and political leaders should not get embroiled in these debates, lest India become the lightning rod that bears the brunt of the fury of the US workers. Let the invisible hand of the market make its way. Let US companies and their shareholders enlighten their consumers and workers on the merits of cross-border outsourcing," he advises in a column appearing in Business Today magazine.

The Real economics of offshoring: McKinsey

"Any move to slow down the job migration could actually hurt the United States," says a research report from global consulting firm McKinsey. "Sending US jobs offshore to cheaper labor markets generates heated political debate. Yet offshoring benefits not only individual US companies and their foreign partners but also the US economy, primarily by freeing up funds to create higher-value jobs," the report says

Focusing the offshoring debate on job losses misses the most important point: Offshoring creates value for the US economy by creating value for US companies and freeing US resources for activities with more value added, McKinsey says.

McKinsey says offshoring creates value in four ways:

Cost savingsFor every dollar of spending on business services that moves offshore, US companies save 58 cents, mainly in wages. Offshore workers, who enjoy higher-than-usual wages (in their countries), tend to be more motivated compared to US workers who perform the same role. "Reduced costs are by far the greatest source of value creation for the US economy," the report says.

New revenueIn order to provide offshore services, Indian outsourcing companies buy equipment and services--from computers and telecommunications equipment to legal, financial, and marketing expertise--from US companies. McKinsey estimates that for every dollar of corporate spending that moves offshore, suppliers of offshore services buy an additional 5 cents worth of goods and services in the US. Exports from the United States to India stood at $4.1 billion in 2002, compared with less than $2.5 billion in 1990.

Repatriated earningsMany Indian offshore service providers are in fact US companies that repatriate earnings. Such companies generate 30% of the revenues of the Indian offshore industry. Thus an additional 4 cents of every dollar spent on offshoring creates value for the US.

Redeployed laborOffshoring also brings indirect benefits to the US economy: Capital savings can be invested to create new jobs. "Indeed, this is exactly what has happened over the past two decades as manufacturing jobs moved offshore," McKinsey says. "As jobs in call centers, back-office operations and repetitive IT functions go offshore, opportunities to train labor and invest capital to generate opportunities in higher-value-added occupations such as research and design will appear."

Net-Net, offshoring, far from being bad for the US, creates net value for the economy. "It directly recaptures 67 cents of every dollar of spending that goes abroad and indirectly might capture an additional 45 to 47 cents--producing a net gain of 12 cents to 14 cents for every dollar of costs moved offshore," McKinsey says.

The report acknowledges that the total possible wealth creation does not ease the plight of people who lose their jobs or find lower-wage ones. "These issues must be addressed. Training programs and generous severance packages, perhaps accompanied by innovative insurance programs, are among the measures that could mitigate the effects of the transition without great cost to the economy," McKinsey says.

The key message is that while many people will undoubtedly suffer short-term disruption, it should be set against the consequences of resisting change: If US companies can't move work abroad, they will become less competitive--weakening the economy and endangering more jobs--and also miss the chance to raise their productivity by focusing on the creation of jobs with higher value added. "The openness of the US economy and its inherent flexibility--particularly that of its labor market--are two of its great recognized strengths. The current danger is that public policy will make its economy less flexible. To do so would endanger the economic well-being of the US."

Click Here to read the full version of McKinsey's defense of offshore outsourcing.